3 Minute Gold News

Jim is the Chief Global Strategist for West Shore Funds, former general counsel for Long Term Capital Management, and a consultant to the U.S. Intelligence community and the U.S. Department of Defense.

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Jim Rickards

There’s a prestige element to the yuan being added to the basket of currencies making up the IMF’s Special Drawing Rights (SDR), but Jim sees the addition as being highly political.

The Chinese yuan doesn’t really qualify to be in the basket.

The Canadian dollar and the Australian dollar have a stronger case for being added in the SDR than the yuan.

But China has a much larger economy, and China was kind of getting stiffed by the U.S. Congress. They have 13% of the GDP but they have less than 5% of the votes at the IMF.

So, in order to give them more “quota” or voice there has to be something that goes through the U.S. Congress. But the congress has been sitting on this for about three years, and China was starting to go its own way with the Asian Infrastructure Investment Bank (AIIB) and the BRICS bank. So the IMF had to get China on the bus, so to speak.

Going forward this will be more significant because in the next global financial panic, like we had in 2008, and which happens every eight or nine years, it’s going to be bigger than the central banks.

The central bank balance sheets are already stretched.

The only clean balance sheet in the world is the IMF — they’re only leveraged about 3 to 1.

When the next global financial panic hits then the IMF will print trillions of SDRs to reliquify the world, and they’re going to need China’s help to do that because China is the biggest buyers of SDRs.

China has implicity said they’re not going to play the SDR game unless they’re in the club. Now they’re in the club.

OFFICIAL ENTRY IN SEPTEMBER 2016

There are major trillion dollar portfolios around the world. Sovereign Wealth Fund of Norway, Obidabi Investment Authority for example. They mimic the SDR weighting.

They can’t buy SDRs because there aren’t that many of them, but they can get out of the currency wars by keeping their mix of currencies the same as the weighting of the SDR.

So, if the US dollar is up and the euro is down or the other way around, they’re unaffected by it.

The major portfolios are going to have to reduce their euro exposure and increase their yuan exposure in order to track the basket. That’s going to give the yuan a little tail wind.

This will be neutral for the U.S. dollar in the short run, and in the longer run Jim sees the SDR as the replacement for the dollar as the world reserve currency, not the yuan.

The yuan is a decade or more away from being a real reserve currency. One reason is that they don’t have a large government bond market.

The yuan is a trade currency and a payment currency but it’s not a true reserve currency because they don’t have a bond market, so they there’s nothing to invest in. They would need a bond market with maturities from 30 days to 30 years. They would also need repo, futures, options, settlement, clearance, primary dealers — they would need a whole network of things.

Above all they would need a rule of law. It’s a communist society. They don’t have a good rule of law so why would you invest in it?

The Greek bank holiday and long lines to get a few euros for the day. Debt deals behind closed doors. The media telling us what opinions to have. China building islands in the South China Sea and claiming all the international waves. More dealing to come. More standing in line for those who owe. Who owes? There’s a long line of nations in debt and this is far from done.

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Preparing for the Fall live boutique album is available on iTunes — featuring Wag the Dog, Black Swan Dive, American Pie and Gods of the Copybook Headings.

The copybooks of the early 1900s gave us all the wisdom we need. The sayings that were copied are the truths, the gods, of our world. All the empires who followed the gods of the marketplace instead have fallen, and there’s terror and slaughter when the gods of the copybook headings return. The lyrics are by Rudyard Kipling. One of my gurus.

See the bankers wave their Wall Street wands and conjure piles of paper green. Naked short selling is like betting that your neighbour’s house will burn down. But in this scenario it happens to burn down. If the bankers win then we lose the whole world as we know it. I wrote this in 2009, with a lyric “A little grease (Greece) is floating out to sea, and little pigs (Portugal, Italy, Greece and Spain) are bobbing up and down, they’ll send a storm and we’ll see, when the tide goes out who’s naked on the beach“, and it’s coming on now. The world is changing as we know it.

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Nothing on this site is intended as individual investment advice. We’re all watching which way the wind is blowing.